RegTech, another neologism that was created to capture a new industry by adding the -tech suffix to the abbreviation of a traditional sector. In this case, regulatory or regulation, combined with technology. Many consider RegTech as a sector within FinTech, Put simply, the goal of RegTech is to deploy technologically advanced solutions to meet the regulatory compliance needs of financial services.
Since the 2008 financial crisis exposed the shortcomings of oversight on financial services and its ability to protect the consumer, this sector has been ever growing. As a result of the Great Recession, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the biggest financial regulation reform in the US, was born. Now, RegTech plays a particularly important role in today’s world, as we navigate through the pandemic and the economic consequences.
According to Bloomberg with data from Boston Consulting Group, banks globally have paid USD$321 billion in fines between 2008 and 2016. This is greater than the 2018 GDP for Pakistan, the world’s fifth most populous country. Imagine what we could have achieved if we redeployed the capital from even just a portion of the fines. And remember, this number does not include the ballooning annual costs that banks spend to address compliance, which is estimated to be upwards of USD$100 billion a year.
Where is regulatory compliance headed? A London-based think tank, JWG estimates that over 300 million pages of regulatory documents will be published by 2020. The average reading speed is between 200 and 250 words per minute, and you can’t speed read laws and regulations, as even a single word can fundamentally change the meaning of the text. The goal and the future here is simple. Technology, or more specifically RegTech.
RegTech can help reduce the cost of addressing compliance for financial institutions, unshackling up funds to invest in growth areas. As risk and compliance comprises many areas such as issue management, risk assessment, and complaints management, banks have many opportunities to utilize advanced technological solutions to address the overwhelming amount of regulations and reduce risks.
Incumbents such as MetricStream and IBM provide an integrated approach to Governance, Risk and Compliance (GRC) solutions, aiming to cover the breadth of the risk and compliance with a single app. On the other hand, you have innovative startups such as Ascent and ComplyAdvantage, addressing a single aspect of risk and compliance with their technology, regulatory change management and financial crimes respectively. Both have recently raised Series B funding in 2019.
What does this mean? There are already many players within the RegTech space, vying for funding. Add this to the regulators dishing out record fines from enforcement actions and issuing personal cease and desist orders to senior executives, there is a pressing need for positive actions. This is certainly one of the most important growing sectors of FinTech.
